Uneconomics: a challenge to the power of the economics profession

The fall-out from the financial crash is continuing to destroy lives around the globe, yet the power of economists is being entrenched, rather than questioned. In this debate, we bring together anthropologists, sociologists, historians and heterodox economists to ask and answer the big questions.

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When economists Lucas Papademos and Mario Monti were
parachuted in as Prime Ministers of Greece and Italy respectively in November
of last year, this heralded a new era in the power of the economics profession.
With questions still being asked about the failings of economics and economists
in the build-up to the financial crisis, this technocratic rebuke to democracy
was further evidence that this crisis is entrenching existing elite power,
rather than weakening it. Not that you would hear any of this being discussed
in an economics classroom.

In the same month, Harvard economics students staged a
walkout from the classroom of conservative economist Greg Mankiw, accompanied by an open letter
explaining why. As the letter argued:

Harvard graduates play major roles in the financial
institutions and in shaping public policy around the world. If Harvard fails to
equip its students with a broad and critical understanding of economics, their
actions are likely to harm the global financial system. The last five years of
economic turmoil have been proof enough of this.

Elsewhere, the documentary, Inside Job, contained startling
reports of how senior economics professors had been paid large consultancy fees
to report that economies such as Iceland’s were fundamentally sound. From the
1990s onwards, a number of senior American economists repeatedly ‘discovered’
that financial derivatives were reducing risks within the financial system.

We now know that the financial crisis has produced a depression
in many Western economies, which will destroy lives and many cherished public
institutions. According to the figures of the UK government, living standards
in 2015 will be lower than 2002. One of the ingredients of this crisis was that
the financial system (including its regulators) was a mineshaft crammed with
canaries, scarcely any of whom had any inclination or ability to sing. Those
that did, such as Nassim Taleb
or Nouriel Roubini, have
since acquired the status of gurus for this single reason.

And yet, five years on from the origins of the crisis, the
power (if not the authority) of economics in public life is, if anything,
greater than it was before. Credit-rating agencies make governments shudder
with their risk models. The UK government’s austerity programme was backed up
by zany claims from conservative economists (especially in the think tank Policy Exchange) that rapid cuts
in public spending would result in economic growth. When these predictions
turned out to be false, few even bothered to register their surprise.

As Woolfgang
Streeck recently argued, there has always been an implicit tension between
the demands of economic experts and those of democracy, but the crisis has
elevated this to a new level. We are used to elected politicians (such as Ruth
Kelly and Vince Cable in Britain) being trained economists or to economic
advisors shaping undemocratic regimes (such as Milton Friedman in Chile in the
1970s or Jeffrey Sachs in Russia in the 1990s). But, until 2011, we had never
witnessed the phenomenon of economist as unelected Prime Minister.

It is time to acknowledge an uncomfortable truth about the
public status of economics as an expert discipline: it has grown to be far more
powerful as a tool of political rhetoric, blame avoidance and elite strategy
than for the empirical representation of economic life. This is damaging to
politics, for it enables value judgements and political agendas to be endlessly
presented in ‘factual’ terms. But it is equally damaging to economics, which is
losing the authority to describe reality in a credible, disinterested,
Enlightenment fashion.

The status of economists in public life has taken many
twists and turns, since Adam Smith’s Wealth
of Nations was published in 1776. The classical political economists, such
as David Ricardo and John Stuart Mill, were engaged public intellectuals, whose
analysis covered institutions, politics and morals. It was only after the
‘marginal revolution’ of the 1870s that economics reappeared in its
neo-classical manifestation, the form with which we associate the term
‘economics’ today. In drastically delimiting the scope of economics to the
study of rational decision-making by individuals, the marginalists withdrew
from describing capitalism or society, creating space for rival social sciences
to emerge for this purpose.

The methodology of neo-classical economics famously
presupposes that human beings are rational maximisers of their own utility.
This idea has worked wonderfully for the economics profession as a basis for
model creation, but dreadfully badly for the world that economics purports to
describe. It has generated images of economic life, which are excessively
simple and quantifiable. The political and cultural function of economics
(which, with the notable exception of Deirdre McCloskey,
economists have scarcely ever reflected upon) has become one of stripping out
ambiguity and complexity. Their usefulness to politicians lies in the rigidity
and global reach of their methods, but not necessarily in the truthfulness of
their findings.

Two caveats should be made in defence of economists at this
point. Firstly, many neo-classical economists go to great lengths to
acknowledge the unrealism of their methodological assumptions. As Gary Becker, the esteemed Chicago
School economist, likes to put it, neo-classical economics is simply one
particular “approach” to human behaviour. This apparent humility then enables
Becker and his acolytes to extend this ‘approach’ into all walks of life
without any further justification for doing so, as popularised in the
best-selling Freakonomics.

Secondly, economists are typically far more alert to the
frailty of economic knowledge than those they are advising. Academic economists
will stress the presence of ‘uncertainty’ underlying all situations, highlight
the limitations of their data and qualify their presuppositions. The problem is
that adrenalin-fuelled bankers, over-worked politicians and regulators have
little interest in such nerdish conditionality. They want numerical answers
with which to defend their actions.

The bizarre truth, then, is that economics has attained its
current pre-eminence in public life through saying as little as possible about
the institutions, character and practices of contemporary capitalism. Combining
acute humility regarding the realism of its premises, with the appearance of certainty regarding its
conclusions, it has created a dangerous form of rationalism that is deeply
entangled with economic life, while being entirely unable to reflect on that
fact.

The discipline has performed a modicum of self-criticism
over recent years through admitting findings from two rival fields, namely
psychology and biology. Behavioural economics, neuro-economics, happiness
economics (as debated here
on OurKingdom), ecological finance and complexity theory are now being looked
to, in search of a more realistic vision of economic life. George Soros’s
Institute for New Economic Thinking, which was founded in 2009 in response to
the financial crisis, is dominated by these modified versions of neo-classical
economics. Andrew
Haldane of the Bank of England has seized on many of these schools of
thought, to criticise the status quo. While efforts by economists to re-engage
with economic reality must be welcomed, there is still a total dearth of
institutions, power or culture in the portraits that these sub-fields paint.

Yet this is far from true across the social sciences more
broadly. Following the marginal revolution, sociologists took up the task of
describing the institutions and regulation of industrial capitalism, which
economics had abandoned. Anthropologists asked fundamental questions of
economic life, regarding the nature of exchange, of money and of production.
Political economy survived in various Marxist, evolutionary, Keynesian and
neo-institutionalist traditions, which now go under the umbrella term ‘heterodox economics’.

Leading figures from these disciplines have attained great
public influence in the past. Keynes’s role at the 1944 Bretton Woods
conference is the leading example, but evolutionary economists (such as Richard
Nelson in the US), sociologists (such as Anthony
Giddens in Britain) and Marxists (such as Michel Aglietta in
France) have all performed roles as senior economic advisors to governments.
But neo-classical economic thinking has become the vernacular of contemporary
government, and much of what these thinkers address would nowadays be described
by policy-makers as ‘externalities’, the neo-classical term for that which
occurs outside of the market price system.

As a contribution towards reversing some of these trends,
OurKingdom and openEconomy are hosting a debate entitled ‘Uneconomics’.
Commissioning and inviting contributions from sociologists, anthropologists and
heterodox economists, the debate will seek to further public understanding of
economic life and the present crisis in two ways.

Firstly, we will seek contributions from social scientists
doing detailed empirical work inside the dominant institutions of contemporary
capitalism. For example, the ‘social studies of finance’ has greatly
illuminated institutions such as derivatives, stock markets, trading screens
and Wall Street culture, thanks to ethnographic work of scholars such as Donald MacKenzie
and Caitlin Zaloom.
The skills to watch and to listen – in the hands of journalists such as Michael Lewis and the
anthropologist-turned-journalist Gillian Tett - have
proven far more important in furthering our understanding of the current crisis
than orthodox economics.

Sociologists, anthropologists and ‘cultural economists’ also
have important things to say about institutions such as debt, accounting,
regulation and credit-rating. The anthropological insight, that how we
represent things affects how we act, has become more widely accepted since the
beginning of the crisis; think how the practice of ‘mark-to-market’
accounting has been held up as one of the culprits for the banking crisis.
But public debate is typically denied the insights of anthropologists and
sociologists.

Undoubtedly this is partly the fault of scholars themselves,
who either refuse to or fail to present their evidence in ways that meet the
demands of a numbers-hungry, attention-deficient media. But if we accept that
simplistic, mechanical portrayals of economic life contributed to our current
crisis, then we must also create more space for nuanced and ambiguous
depictions of reality. Strangely, this has been accepted in management theory
for decades, but public policy-making still clings to a machine-like view of
the world.

Secondly, we will seek contributions which reflect
critically on the relationship between social sciences and the state.
Sociologists such as Marion
Fourcade and Peter Wagner
have written extensively on the co-evolution of social sciences and public
policy, while Phillip
Mirowski has provided brilliant studies of the history and delusions of
economics. Science studies scholars, such as Michel Callon and Fabian Muniesa, now analyse
economics purely as a facilitator of
economic activity, rather than as its representation. Manchester University’s CRESC centre has published numerous papers
on the present crisis as an ‘elite debacle’, in which particular experts failed
in their public duties.

But how might things be done differently? How could the
stranglehold of the neo-classical worldview over public policy be weakened (if
it should be at all)? What are the historical precedents of more nuanced,
culturally-attuned forms of social science being used as a basis on which to
form public policy and advise politicians? And how can public understanding of
capitalism be furthered, in ways that don’t simply replace one blanket
explanation (the rational maximiser) with another (the brain)? Could the
marginal revolution be reversed, and classical political economy be put back
together again?

These questions are not new. But their urgency is heightened
by the present crisis. Of all the social sciences, economics has proven itself
to be the most politically useful – some might say politically malleable – but
its lack of realism has become a critical issue with serious economic and
political consequences. ‘Uneconomics’ is needed to explore alternative forms of
expertise and advice, and an alternative basis for public economic debate.

The second article in the debate, by Judith Marquand, will be published early next week.